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The US tax rescission doctrine: when the parties want an agreement to disappear

23 January 2014

By Eric D Ryan and Joe Helm

The old saw about the best-laid plans of mice and men also goes for international tax planning and transactions with significant tax consequences.

Sometimes the business and/or financial assumptions around the planning turn out to be mistaken, sometimes the resulting structure turns out to be too complex to manage relative to the savings it produces and sometimes parties just mutually decide to back out of a deal after some or all of its parts have been executed. What is to be done when the consequences of such a transaction or set of transactions might create undesirable commercial or tax effects?

Most of the time, the answer is, unfortunately, not much, absent ‘strong proof’ that the form of the transaction did not comport with the parties’ intent, or mistake (in the formal legal sense) or fraud (in other words, the common law grounds for unilateral rescission) — circumstances quite challenging to find in the inter-company context. It may be that the parties need to terminate the original agreement and transfer assets and liabilities back between them at the then-current values — thus creating two separate transactions, with separate, likely unwanted, consequences…

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